Dalio stated that we are on the verge of significant changes in MMF, domestic politics, and the international order, and it all depends on whether these matters are handled in a wise and cooperative manner.
On May 14, the founder of Bridgewater Fund, Dalio, published an article titled "The Art of the Deals and the Forces Behind Them," analyzing the deep logic of the current transformation of the international order from a global macro perspective based on the recent trade agreements reached between the USA, China, and Saudi Arabia.
Dalio believes that five fundamental forces (debt monetization, domestic class divisions, international power restructuring, exacerbation of natural disasters, and technological explosion) are driving the world towards a critical point, and discusses the gains, losses, and potential risks of the strategies that countries (especially the USA) should adopt.
The article concludes that according to numerous objective indicators, the existing currency, domestic politics, and international geopolitical order are deteriorating and declining. Meanwhile, the threat of natural disasters is increasing, and technological progress is advancing rapidly.
The following are the highlights of the article:
There are two types of driving factors in the world. One is the everyday issues that attract public attention, sway market sentiment, and lead to short-term fluctuations; the other is the core contradictions and fundamental forces that propel profound changes in the international order.
Whether the USA's fiscal deficit can be reduced to 3% of GDP will determine the fate of debt and currency value.
"American exceptionalism" remains solid, allowing funds to continuously flow into the USA and create mutually beneficial investment agreements, which can greatly improve the situation. The final outcome will entirely depend on how well these agreements are managed.
We are on the brink of significant changes in currency, domestic politics, and international order, and everything depends on whether these matters are handled wisely and cooperatively.
For investment, it is important to first develop a well-thought-out investment plan and avoid reacting passively to news and market trends.
The following is the full translation:
The rapid conclusion of the US-China Phase One Agreement reflects a rational and pragmatic attitude (bringing reasonable optimism for subsequent negotiations). Donald Trump and his team are seeking investment cooperation during their trip to the Middle East in Saudi Arabia (I am confident in its success, and other reasonable trade agreements are expected to follow). Soon, there will also be a struggle with Congress over the budget proposal (I hold a more cautious attitude towards this). Meanwhile, agreements with Iran and the Russia-Ukraine agreement are brewing, and some progress is anticipated. This article aims to explain how to understand and respond to the current situation from the perspective of Global macro investors—especially based on close observations of the recent agreements between China and Saudi Arabia.
In my view, there are two categories of driving factors in the world: a) daily issues that attract public attention, sway market sentiment, and cause short-term volatility; b) core contradictions and fundamental forces that drive profound changes in the international order. Although both require attention, it is the latter that truly determines the course of history. One must not neglect the deeper dynamics that dominate developments due to the pursuit of short-term news hotspots—this awareness is especially crucial for investment decisions.
Regarding these fundamental forces, I will reiterate the five core factors driving the global landscape and their essential characteristics:
1) The debt/currency power that determines market and economic direction and shapes monetary order;
2) The domestic wealth and value gaps that influence political ecology;
3) The forces of the world order/disorder around the international landscape;
4) The impact of natural disasters (droughts, floods, epidemics);
5) Human creativity, especially the changes brought about by new Technology.
The pattern of the critical moment
The current state of these five forces constitutes the real situation that leaders face in decision-making—regardless of who they are, these structural background conditions will not change.
1) Debt/Money force: Determines the direction of the market and economy, shapes the monetary order.
The USA and many governments are facing huge debts and deficits, and the trends in the market and economy will mainly be driven by this fundamental issue, whose influence far exceeds daily news and individual leaders' decisions. Huge debts will force the government to obtain funds through fiscal means (taxes and spending) or debt monetization; either choice will have far-reaching effects. The reality of monetary law indicates that when government debt is high and its growth exceeds the demand for debt assets such as Bonds, it is inevitable that a combination of spending cuts, tax increases, and loose monetary policies (which harm creditors' interests) needs to be adopted. This law does not change with presidential succession. The games surrounding coping strategies (such as the struggle between President Trump and congressional leaders, and Federal Reserve Chairman Powell) will frequently appear in the news and cause short-term fluctuations. As stated in my new book 'The Path of National Bankruptcy: The Great Cycle', whether the fiscal deficit can be reduced to 3% of GDP will determine the fate of debt and monetary value. The USA is the only large Capital Markets in the world (accounting for nearly half of the global market) and is also the world's largest buyer of Commodities. The USA has a solid capitalist environment that respects investment tools as a treasure of wealth and still possesses the rule of law, an entrepreneurial and innovative culture, and relatively free speech, collectively referred to as the 'American exceptionalism'. The ability to attract continuous Inflow of funds into the USA and create mutually beneficial investment agreements can greatly improve this situation. The ultimate outcome depends entirely on how these agreements are managed.
2) The gap in domestic wealth and values: shaping the political order.
These factors have led to irreconcilable differences, with both sides almost unwilling to compromise, reflected in the rise of populism and populist leaders, as well as the typical rise of authoritarian leadership, and the weakening of democracy and the rule of law, as populist and authoritarian leaders struggle against opposition to achieve what they consider necessary changes. The relative powers of the president, judiciary, and legislature, along with the American democracy we know, are likely to be tested. In addition, the plight of the bottom 60% of the population has not been resolved, and political polarization and media attacks are bound to escalate.
3) International order/disorder forces: Determining the global landscape.
The lack of a single dominant world power, combined with more countries having strong populist leaders who face the aforementioned issues and are inclined to fight for their own interests rather than pursuing harmony, has led to an increase in unilateral decision-making and a decrease in multilateral decision-making, exacerbating conflicts. During this period, the risks of trade, technology, geopolitical tensions, and military conflicts have increased, prompting countries to adopt more aggressive and defensive actions. This compels countries to ensure secure sources of domestic production and other necessities. Multilateralism is diminishing, while bilateralism (bilateral agreements) is on the rise, with both the USA and China attempting to play roles in their respective ways. Countries that provide the best agreements to other nations will achieve greater and better outcomes. How this issue is managed is crucial for how the world order changes.
4) The threat of natural disasters.
Droughts, floods, pandemics, and other disasters continue to worsen, causing huge economic losses and physical destruction. The strength of each country's adaptability will be key.
5) Human creativity: especially technological innovation.
Human cognitive abilities in most fields will experience qualitative leaps due to technological breakthroughs, a force that can create immense welfare but may also bring profound disasters.
In short, the overall situation presented by numerous objective indicators is that the existing MMF, domestic politics, and international geopolitical order are deteriorating and declining, while at the same time, the threat of natural disasters is intensifying and technological advances are accelerating. Meanwhile, most of these factors are being recognized and addressed by a unique right-wing/capitalistic American president and his administration.
The current response strategies include:
The achieved Trades include: realizing revenue increase through tariff design and enhancing the overseas competitive advantage of domestic enterprises; attracting foreign capital inflow; optimizing global investment layout.
Relaxing government regulations to improve production efficiency.
Reducing administrative waste and optimizing Asset Management.
Cutting the fiscal deficit and addressing government debt (specific paths remain unclear).
Using administrative means to break through existing legal frameworks, while advancing a hard-right agenda under the premise of securing critical swing voter support.
The core question is, how to respond to these critical situations?
Will these situations and forces be managed well or poorly - that is, is there a reasonable basis for handling these situations, or will there be unstable and chaotic behavior? Does Donald Trump's extreme style of trade negotiation and the adversarial negotiation style indicate that he and his administration are able to properly address our issues? Is his tariff declaration merely an effective pretext that eventually led to a productive two-day dialogue between China and the USA, resulting in a reasonable short-term agreement, followed by serious negotiations? What has happened so far supports the view that Donald Trump is addressing those long-neglected important issues in a relatively erratic yet productive manner. But frankly, it is still too early to draw conclusions.
Suggestions at a Critical Moment:
Remember, for news to have value, it should be viewed in the context of the joint effects of major forces to determine the direction of significant cyclical changes, especially changes in monetary order, domestic political order, global geopolitical order, climate change, and technological changes (the five major factors).
Remember, we are on the brink of significant changes in monetary, domestic political, and international orders, and everything depends on whether these issues are handled wisely and cooperatively.
Remember, when investing, it is important to: 1) develop a well-considered investment plan that includes your commitment to Asia Vets diversified investments; 2) do not react to news and market trends without careful consideration afterwards.
The views expressed here are my personal opinions and do not necessarily represent the perspective of Bridgewater Fund.
Editor/danial
